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U.S. stocks could fall on market open
Dollar around March lows; Nikkei jumps on bank news

By Martin Cej, CBS.MarketWatch.com
Last Update: 4:27 PM ET Sept. 14, 2001

http://cbs.marketwatch.com/news/story.asp?column=Market+Snapshot&siteid=mktw

NEW YORK (CBS.MW) -- The U.S. stock market, the world's largest, will open for business Monday -- after the longest closure since the Great Depression -- according to New York Stock Exchange Chairman Richard Grasso.

Stocks are likely to fall when financial markets resume trading, analysts and investors said, yet losses are expected to be short-lived, as investors at home and abroad express their confidence that U.S. financial markets remain the safest in the world.

Investors will also have to weigh renewed weakness in the U.S. dollar Friday, as well as extended declines by overseas markets. Bonds rallied, however, as buyers continued to pile into the perceived haven of U.S. government-backed securities. Initial public offerings slated for next week have also been pushed back, according to Dealogic CommScan, which tracks the market for IPOs for banking and brokerage clients. Read more on the IPO market.

"We have stumbling blocks out there, like bad third-quarter profits on the way and the fact that the U.S. economic recovery may be pushed out to a later date," said William Barker, an investment strategist at Dain Rauscher Wessels. "But it's a good move to wait until Monday. The American people will have the weekend to look at the fundamentals, so there won't be a massive selling wave."

"People will recognize that this is not a reason to dump stocks," Barker said. "I expect a down market, but not aggressively so."

In overseas trading Friday, European stock markets extended the losses as earlier resilience in the aftermath of U.S. attacks gave way to uncertainty over the political and economic future. See full story.

Earlier, Tokyo's Nikkei index soared above the 10,000 mark. Canadian stocks tumbled in thin trading as investors tried to assess the impact of the attack on the U.S. economy.

The dollar slumped against the yen, falling to levels not seen in six months. The dollar fell to 117.34 yen, below Tuesday's lowest levels following the terrorist attacks of about 118.55. The dollar fell to a six-month low versus the euro, with one euro worth 92.12 U.S. cents in recent trading.

U.S. Treasurys rallied for a second day Friday, pushing yields on short-term debt to fresh lows not seen since the 1950s on expectations the terrorist attacks will prompt more interest-rate cuts.

Most of the buying in Treasurys was centered in the short-maturity end of the yield curve, which tends to be highly liquid and an easy short-term investment vehicle. See full story.

"First we'll see excessive volatility [in the stock market] with a trend toward weakness, then a modest rally," said David Sowerby, chief market strategist and portfolio manager at Loomis Sayles & Co., which oversees about $65 billion in assets. "In the third stage, which is the stage that will prevail, you'll see a more positive direction in the market."

Sowerby said that assurances from the Federal Reserve and other central banks that sufficient liquidity is available to maintain the integrity of the monetary system, as well as the likelihood for lower interest rates, will underpin a recovery in the stock market.

"In the early days of trading we'll be trying to make sense of it all, but three to six months out, I'm confident that fiscal and monetary stimulus will have the market higher," Sowerby said. "Nobody has called me with any desire to take money out of the market, but people have asked me to put money in."

Some investors will likely use any declines in the stock market as an opportunity to add to positions, secure in the belief that the terrorist attacks on the U.S. may slow the recovery of the U.S. economy, but not prevent it.

"We are buckling down for some volatility, but there's a reasonable probability that there will be a rallying of the American spirit," said Jeff Brown, a principal at Highstreet Asset Management in London, Ontario. Brown manages the firm's U.S. portfolios.

"We will not join the panic if there is one, nor will we contribute to starting one," Brown said. "The best thing we can do for our clients is keep with our long-term investment plans."

'Safety valves'

Brown said that he could not imagine betting against a U.S. economic recovery, and added that other investors' concerns will be assuaged by the concerted efforts of the Fed and other central banks to ensure the global financial system won't seize up. See full story.

"If you wanted safety valves, we're hearing everything we need to," he said.

The greatest concern of stock investors is not the likely knee-jerk slide by U.S. stocks at the open, rather it's what to buy at a time when the U.S. economic slowdown has been exacerbated by the attack on the American financial center and rising oil prices.

"While some pause in consumer spending and business investment is likely, the efforts of all levels of governments to return to normality and response of people and officials in New York and Washington strongly suggest that economic effects will be of limited duration and scope," said David Blitzer, managing director and chief investment strategist and Standard & Poor's.

Active issues

Among the stocks likely to be active in early U.S. trading are the insurance firms. The World Trade Center's two towers plus two other buildings on site were valued at $3.2 billion this year and the complex could cost an estimated $2.5 billion to $3 billion to construct today, excluding the cost of the land.

U.S. property-casualty insurer Chubb (CB: news, chart, profile) said it has "significant property exposure" in the World Trade Center and estimated its pre-tax loss at $100 million to $200 million, subject to revision as more facts become known.

Perception vs. reality

Jeff Saut, chief investment strategist at Raymond James & Associates, said he would be advising clients to buy selectively on weakness, even in the insurance sector.

"The difference between perception and reality is where opportunities lie," Saut said. "If we see Allstate (ALL: news, chart, profile) falling with the rest, we'll advise to buy."

Saut said Allstate is not as exposed to claims stemming from the New York attack as many other firms, but it may be dragged lower with the group.

Oil stocks, gold miners and defense issues are likely to gain as rising oil and bullion prices hoist producers, and the likelihood of a military strike could mean increased sales for makers of armaments, jets, weapons and propulsion systems.

Conversely, airline stocks including AMR Corp. (AMR: news, chart, profile) and UAL (UAL: news, chart, profile) are likely to fall. "I suspect that gold stocks will tend to do well, and domestic oils. Insurance stocks could be under some pressure, or anyone significantly tied to Manhattan," said James Oberweis of Oberweis Securities. "I would expect airline stocks to have severe pressure, too. Air travel may see some long-lasting changes."

Saut, however, is not among those expecting a quick plunge, then a sustained recovery. He anticipates the opposite.

"The market will be propped up temporarily, but we're in a primary downtrend," Saut said. "There is no precedent for this, and if there was ever any doubt that we were heading into a recession, that was thrown out the window," Tuesday.

Martin Cej is global markets editor for CBS.MarketWatch.com in San Francisco.